". . . for almost a century the basic principles on which this civilization was built have been falling into increasing disregard and oblivion." -- Hayek

Tuesday, October 14, 2008

Obama Spreads Wealth

Now, that's something I don't like to hear: "I think that when you spread the wealth around it's good for everybody."

Perhaps there is something Senator Obama, and his supporters, could learn from Ludwig von Mises on the Senator's apparent fondness for taxing the wealthy:

"Popular opinion is inclined to believe that the taxing away of huge incomes does not concern the less wealthy classes. This is a fallacy. The recipients of higher incomes usually consume a smaller proportion of their incomes and save and invest a larger part than the less wealthy. And it is only through saving that capital is created. Only that part of income that is not consumed can be accumulated as capital. By making the higher incomes pay a larger share of the public expenditures than lower incomes, one impedes the operation of capital and eliminates the tendency, which prevails in a society with increasing capital, to increase the marginal productivity of labor and therefore to raise wages." [Ludwig von Mises, Interventionism, p. 51]

I disagree with Senator Obama that "spreading the wealth around" is good for everybody. One reason for this is the important insight offered by Ludwig von Mises in the quote above.

There is at least one other reason which should be pretty obvious. The plumber/citizen asking the question clearly thinks he will not be better off if the Senator's tax plan to spread the plumber's wealth around becomes law. After all, the plumber clearly recognizes that he will be worse off with less of his wealth when government gives some of his wealth to someone else.

Actually, I think most of the Senator's tax plan is not really about wealth, and I suspect the plumber in this video was not thinking about the Senator taxing wealth either. I suspect the plumber was talking about the Senator's promise to increase income taxes. And, I suspect from the Senator's answer that it might be important to draw a basic distinction between income and wealth.

As I discussed with my public finance course recently income is earned. Income is a flow of money per time period that is received because the income earner is productive with respect to goods and services that others value. Wealth, on the other hand, is a stock. Where does wealth, or this stock of wealth come from? Wealth is chosen. In order to have wealth a person has to choose to save from income rather than consume it all.

In order to "spread the wealth around," Senator Obama has to take wealth from me or you or the plumber and then give it to someone else. In doing that wealth, which is a stock remember, is taken by government, and then government gives income to the recipient. What does the recipient do with that income? My guess is that the recipient probably spends it. After all, the policy idea the Senator is promoting is to spread the wealth around to those who don't have it. It would not make much sense to the Senator, I don't think, to take wealth from one person just to "spread it around" to another person who has wealth. The recipient is picked out of the crowd, in other words, because in the past the recipient has not tended to choose to try to make wealth out of his or her own income. The Senator's idea of spreading the wealth around would actually not spread the wealth around. Instead it would turn wealth into income, and wealth would be lost as a result.

But, I don't have to assume the recipient spends all the income that is received from the government's transfer payment. Suppose we assume government has taken $100,000 of wealth from some of the wealthy that it will spread around to 100 people who do not have wealth. Each of these 100 people will then receive an extra $1,000 in income for the year in which they receive their spreading-around-the-wealth-check. Assuming each of these 100 people save 20% of the income from the government's spreading the wealth program, the recipients all combined will then choose to save a total of $20,000 of new wealth. In other words, even assuming a pretty generous savings rate for each recipient, a program based on ideas like Senator Obama's for spreading the wealth around would turn $100,000 of accumulated wealth (and capital) into only $20,000 of wealth. Here again, the Senator's idea would turn wealth into income and wealth would be lost as a result.

I suppose some might think such a result is not a bad thing, perhaps some would think such a result is even a good thing. But less wealth means less accumulated capital over time, and less accumulated capital over time means less prosperity for all who live in our system of political economy.

This leads me to think about my son who loves to play Mario video games. I just can't seem to get the idea. I must be too old to relate. My fingers just never get it. But, what I see in a lot of these video games is the Mario character running around all over the place, here and there with those fast legs and feet just churning. The point of all this churning seems to be for Mario to pick up little treasures here and there all over the place. It seems to me that Senator Obama must think that wealth is a lot like this, otherwise I can't understand why one would support a spread-the-wealth-around policy. It makes sense to me if we find wealth. It makes no sense to me at all if we each choose the wealth we have.

So, maybe there could be a new Mario video game: Mario and Friends Spread the Wealth. The game would of course have Mario churning his legs and feet all around here and there collecting little morsels of wealth. He would find them in houses and in buildings, in parks and on roadways, in banks and in factories. Mario would run around and make his collections which he would then take to the central collection house where the wealth morsels would be left. Then off he would run with his churning legs and feet to find and collect even more wealth morsels to bring in to the central collection house. Of course, there would be another part to the game. Mario's friends would run to the central collection house and grab handfuls and armfuls of dollars which they would then run with all around the city and the country side looking for people and households and maybe even businesses who are without any little morsels of wealth. Of course, Mario's friends would leave handfuls and armfuls of dollars with the morsel-less people they find and then they would return to the central collection house to begin anew their task. But there would still be something else that must be a part of this new Mario game. After some time playing the game, it would have to be the case that Mario found it more and more difficult to find new morsels of wealth to collect. There would have to be more and more running around by Mario, while at the same time his friends were running into morsel-less characters every where the looked. His friends would hardly have to even leave the central collection house before running into many morsel-less characters. And, to really add drama to the entire game, after some time running this spread the wealth game it should be the case that the buildings, the homes, the office towers and complexes, etc. would start to fade away from the video screen. Of course, the game player would be told that the object of the game was to have every game character that Mario and his friends ran into have some morsels of wealth. The Mario and Friends Spread the Wealth game would then be won when every character in the game had at least one morsel of wealth. Of course, for me to really like this new Mario game, one more feature must be a part of the game. If the game player pays attention and learns from the game, then the game player should be able to realize that if he or she decides to stop collecting the wealth morsels then the result will be more and more wealth morsels show up all over the game, and eventually the game must be able to be won by letting the game characters choose for themselves to make their wealth.

Well, I can hope I guess that such a game would be available, because I very much want my son to growth up knowing that his wealth will be the result of his choices, and not the result of politicians running around and collecting wealth from others.